The Number One Financial Tip for Founders

Entrepreneurs think differently to many other people. They tend to have a greater understanding and tolerance of risk. They aren’t afraid of failure. They’re generally very good at setting objectives and putting all of their energy into achieving them.

All of these traits are highly valuable when building a business, but occasionally they can be detrimental when building a life.

For many entrepreneurs across all industries, their life can easily end up revolving solely around their company. This may not necessarily be a bad thing for a young CEO in their 20’s, but as time goes on and life becomes more complicated, it’s vital to put a plan in place that supports both their business and their family.

There are many factors that come into this, but financial security is often the number one element that makes the difference. A solid financial position improves a founder’s personal life, but also creates greater freedom for the business too.

That’s why our number one financial tip for entrepreneurs is to build a financial parachute.

What is a financial parachute?

A financial parachute is an investment pot or safety net that you can access at any time. This investment might take some time to build up, but once you start to get together a reasonable sum of money it can be life changing.

It allows you to have financial assets that are separate from your business. That means it’s not impacted but impacted by the inevitable ups and downs entrepreneurs face, and can be relied upon to support you and your family.

A financial parachute could simply be cash savings, but given the current rate of inflation and the low savings interest, growing this will be an uphill battle. It makes a lot more sense to invest the funds into a diversified portfolio of stocks, bonds and other liquid investments.

This puts your money to work and allows your pot to grow on its own, in addition to any funds you might put in yourself. 

How will a safety net help your business?

There are obviously financial benefits to this. It can allow you to put down a deposit on a family home or pay for private school for your children. It can cover a gap in living costs if you have a lean quarter and it can pay for unexpected medical bills or home repairs.

But it also relieves a weight from your mind. Having a safety net means not needing to worry about next month's bills. It allows an entrepreneur to maintain their focus on doing what they do best. Building a phenomenal business.

It can also allow you to take calculated risks. Many founders come to a stage when they need to play it safe with their company. Once they have a mortgage and kids and a lifestyle to maintain, it can be difficult to make bold calls that could lead to exponential growth, but could also hurt short term cash flow.

A financial parachute provides the freedom to make those calls. In the long term, this could mean a larger, more profitable and more valuable company.

Having a personal financial safety net isn’t just the best thing you can do for your own finances, it’s also the best thing you can do for your business.

How to build a financial parachute

The first step to building a financial parachute is to open an account and start to put money into it. That might sound flippant but it really is just a case of getting started. While the actual process is straightforward, it is important that you get the investment selection right in order to find the best combination of risk and return.

This is what we do for clients at Rosecut, and we’re always happy to explain your options in detail. 

Building an investment portfolio takes time, and the earlier you begin the better the compounding effect will be. Regular contributions over a long period of time can create incredible results. Here’s a quick example:

Initial investment: £50,000
Monthly contribution: £800
Average returns: 5.6% p.a.
Time frame: 5 years
Final investment value: £121,359

Keeping things simple is generally the best way to go. This investment should be boring, predictable and safe, to allow you to take risks in your business. 

If you want to see how much of a financial parachute you could build, we’ve got a unique, free-to-play-with projection, that allows you to see your potential future net worth. Here is a link to our app.

If you’re a tech entrepreneur, we recently released a Whitepaper which takes a deep dive into this issue in the context of the unique life cycle of a tech startup. It includes detailed examples and case studies that show how you can build a big company while also maximising your personal life as well. You can download it for free right here.